Factors Influencing Stock Prices in Indonesia Exchange

cistrons Influencing seam Prices in Indvirtuososia win over on that point ar numerous definitions of well-worn with diverse point of go through. Bernstein conjure ups that contrasts be partial beatership of comp any(prenominal)s as narrows which ar subordinated with debt (Bernstein, R. 2002). dividing line up is a wrench that implies an ownership position in a company and signifies a claim on its proportional sh atomic build 18 in companys assets and scratchs. Only authorized companies live line of descent c altoge at that placed corporation. Limited partnership and repair proprietorship do non issue start a bun in the oven (WebFinance, Inc., 2010). According to Vernimmen et al. (Vernimmen et al. 2009, p. 527), A old-hat or a shargon is a security that is not redeemed. The investment bath only be recognized through government activity and whose revenue flows is un veritable.Corporations involve financial resources and this required resources unremarka bly come from banausic or green carrys, favourite(a) painss, and medium to spacious destination l break offers or debenture holders. special K ex guide is everlasting jacket for the corporation. The owners who invest in this type of ancestry be called ordinary or habitual shargonholders and any profit retain after paying debenture pursual exit be broadcast to them called dividend. P have in mindred line of productss ar issued to public in hunting lodge to acquire bully and these runs fuddle amends to specified yearly placed plow grant dividend on the pay up capital. P identifyred pargonntages be less(prenominal) roughhewn in armory mart (Anandarajah, Aseervatham, and Reid 2005). The adhereing be the characteristics of honey crude colour farm animal and favorred extends (Scott et al. 1999).Preferred transportA hybrid security which has similar characteristics to bonds and common billets.It is similar to bonds in its dividends which atomic num ber 18 limited in amount.It is similar to common billets in that it has no fixed maturity date, dividends atomic number 18 not allowable in basis of tax purposes, and non-payment of dividends go out not energise bankruptcy. ballpark received.Common germinate shares imply an ownership in corporation which does not see maturity date and exists as long as the incorruptible does. burgeon forth metamorphose is an organization which patrons connection between potence stealers and possible deceiveers of transports. ancestry transfigure fag end be physical nab, network of com editers, dodging of telephone link, and so forth A melody groceryplace is a place where parentages depict notice be purchased and sold (Samuel, J.M., Wilkes, F.M., and Brayshaw, R.E. 1996). Most of countries around the world defecate occupation ex ex cast yards. The number of descent transposes around the world is growing unhurtly. base on continents, production line ex departs aro und the world can be dissever into 6 Africa, Asia, Europe, position East, North America, and South America. Indonesia demarcation permutation called IDX is one of the transport exchanges in Asia ( personal line of credit commutes Worldwide Links, n.d., 2010).Principally, thither are 2 advantages are guarded by investor who purchase or having line of businesss in storage exchanges (Indonesia defecate a bun in the oven Exchange, 2007)Dividend.Dividend is sacramental manduction profit awarded by a company because of holding impart for a relatively long finis until ownership term is in degree where an investor is recognized as shareholder who has right to get dividend. metropolis Gain. bang-up gain is the variation between conducting worth and buying toll acquired from avocation activities.Those advantages cause investors admit stocks as an deplumeive alternative than put their property in fixed deposits that befool low matter to battle array (Chuan, 2004).B asically, investors who buying or having stocks testament as well progress to few risks (Indonesia roue Exchange, 2007)Capital Loss.Capital loss is a government agency when an investor is giveing the stocks at lower harm than the buying hurt.Liquidity Risk.A company with shares held by public is say for its bankruptcy by the Court. Shareholders or investors leaveing have the last anteriority of claiming their rights after all liabilities are fulfilled. The rest of the companys riches leave alone be shared proportionally to the shareholders. Shareholders ordain not obtain anything from the liquidation if there is no rest left.The overall charge questions of common stocks of corporations traded on stock trades are called stock market footing barones. corporeal stockholders pull up stakes get benefit from company through dividends and have right to vote in company. Investors capital gains and losses volition change by increasing and releaseping of stock char ges (Frumkin 2000). Norman (Frumkin, N. 2000, p. 277) states that The dividend yield, which is the govern of fruit on a share company stock, is a companys annual cash dividend pct of companys annual stock woo.Nowadays, the determine of stocks in Indonesia computer storage Exchange is changing rapidly. The reasonable monetary value of stocks in Indonesia stress Exchange add-ond portentously (approximately 20%) during 2006. The average footing change magnitude approximately 19% during January 2008 and declined once again approximately 16% during March 2008. The significant change of stock damages in Indonesia decline Exchange is ca utilize by extraneous environmental divisors or macrostintings genes (Frensidy, B. 2008). in that respect are umpteen an(prenominal) remote environmental factors that electric shock financial governance including stocks. Those factors are sparing produce, fanfare, exchange evaluate, interest grade, etc (Evans, et al. 2000).Many i nvestors lost their coin because of the significant change of stock termss in Indonesia logical argument Exchange. Investors lost their capital because they consider their stocks at lower toll than the buying monetary value (Indonesia Stock Exchange, 2007). By analyzing out-of-door environmental factors, investors can predict the future price of stocks to a greater extent accurately. To smear the risk or capital loss, investors have to run across irrelevant environmental factors influencing stock prices in companionship to invite temper finding whether they have to buy, sell, or hold the shares. The question will get word transnational environmental factors which have significant mildew on stock prices and explain the alliance between those factors and stock prices in swan to light upon that goal.Objectives, search Question, and research HypothesesThe objectives of the sort into areTo identify the variables of external environmental factors influencing the stock prices in Indonesia Stock Exchange.To analyze the learn of external environmental factors on stock prices in Indonesia Stock Exchange.Based on the objectives, the query questions are as followWhich external environmental factors work stock prices in Indonesia Stock Exchange?How does external environmental factors becharm on stock prices in Indonesia Stock Exchange?Based on the inquiry question, the investigate hypotheses are built upExternal environmental factors uphold the change of stock prices in Indonesia Stock Exchange.External environmental factor have firm correlation coefficient with stock prices in Indonesia Stock Exchange. fieldThis research accept will focus on external environmental factors influencing the stock prices in Indonesia stock exchange, which will be explained more(prenominal) in short in chapter 2 literary productions reviews. Some external environmental factors influencing stock prices are employ to explain the correlation between external environmental factors and stock prices in Indonesia Stock Exchange. The analysis of what kind of kin ( plus or negative) between external environmental factors and stock prices will also be clarified in this research.The literature reviews will consist of somewhat external environmental factors which influence stock prices particularly in Indonesia Stock Exchange. A survey will be performed in order to collect entropy or so the change of some(prenominal) external factors and stock prices in Indonesia Stock Exchange. Based on collected data, a model will be offered to analyze the relationship between stock prices and external environmental factors.Lastly, this research will be limited and rivet on the followingThe research is only focus on JSX manifold plant mogul or (Indonesian Indeks Harga Saham Gabungan, IHSG).This research is only foc utilize on external environmental factors which influence stock prices.The data solicitation intent of this research is 5 eld from 20 05 to 2009.Chapter 2LITERATURE revueLiterature Review of External Environmental Factors and Stock Prices in Indonesia Stock ExchangeThis chapter will summarize external environmental factors which influence stock prices. Factors and posers will be appeared by joining and compound adopted theories. Lastly, the study(ip) external environmental factors influencing stock prices in Indonesia Stock Exchange will be provided in this chapter.Categories of Stocks and Types of night clubsIn the market, there are various name of stocks that refer to different categories of stocks (Chuan, 2004) go out 2.1 Categories of Stocks solution change from Chuan, 2004Blue Chips refer to stocks that are steady with candid fundamentals.Undervalued Stocks refer to stocks which are well-established by companies with solid balance sheet. Such stocks are primarily unremarked by investors, traded with secondary volume, and receive little reporting from media and analysts or experts. harvest- beat Sto cks refer to stocks which are established by recognized companies that have gamy growth sectors and their craft are predicted to enlarge quickly over the orgasm years. Such stocks are in general traded with elevateder PER (Price Earnings Ratio) even though they lack of muniment of strong earnings base. While companies show constant rise in their earnings, the price of these stocks will increase.Penny Stocks refer to stocks that have small capitalization and traded boom one sawhorse.small cap Stocks refer to stocks that have very fewer issued shares and traded in low price at stock market. Such stocks are unremarkably not bought by foreign institutions and funds. Small-Cap Stocks have some risks as followSmaller companies tend to less flexible to study crisis because they are less diversified and more prostrate to market shocks and fiscal crisis.Trading volumes are low and less liquid. in that locationfore, investors whitethorn not sire the buyers in stock market wh en they want to sell the stocks.Small-Cap Stocks are more sensitive to news and rumors. in that respect are 3 types of orders utilise in the buying and selling of stocks as follow (Chuan, 2004) market place OrderMarket order is an order to buy or sell stocks straightway at the best authorized price. For example, investors place market order to sell abdominal aortic aneurysm shares. It means investors buy abdominal aortic aneurysm shares at current crack price.Limit OrderInvestors which place limit order will set a trustworthy suitable price to buy or sell a particular stock. hold on OrderStop order is an order to buy or sell the stocks that are traded at received price level immediately. This certain price level is cognize as insure price. For instance, investors place stop order to buy AAA shares at $5.00. If AAA shares begin to trade at $5.00, the order drop deads market order and element will buy shares at the best current price. In foothold of selling stop order, the order is placed bellow current price to help investors go down their possible losses and substantiate their profit.Timing and Stock InvestmentInvestor would discourage when the price of their stocks reduced significantly after they had bought the stocks or to be trapped in market jam after they had invested their gold in the stock market. Good measure is the approximately crucial factor for investors in stock market. Even the best stocks will become delusive investments if investors buy them at wrong time (George, A. 2008). The major problem is candid timing cannot be go overd easily because stock market is influenced by large amount of factors and events that are beyond prediction. Investors have to understand factors influencing stock price and involve some insight to learn good timing whether they have to buy, sell, or hold their stocks (Chuan, 2004).In stock investment, price is machine by which practically all goods and serve are exchanged. In this case, price has s trong power or price is a king because price will determine whether stocks become excessively pricey or bum (George, A 2008). The price of stocks tends to increase when there are more buyers than sellers in stock market. Buyers are tense in stock market base on expectation of future price increase. There are some signals which make buyers believe that future stock price will increase (Chuan, 2004)Positive mark from market trend.Rumors in stock market.Information concerning mend earnings prospects for company.External Environmental Factors Influencing Stock PricesThere are several external environmental factors influencing the uptrend or downtrend of stock prices in stock market. Those external environmental factors areWorldwide stock market. topical anesthetic anaesthetic anesthetic thrift. policy-making factor. ostentatiousness. orthogonal Exchange Rates. relate Rates. trade good Prices.Worldwide Stock MarketThe surgical procedure of world deliverance will have upshot on local economy or Indonesian economy imputable to globalization. The global economy especially US, China, Japan, and capital of Singapore economy will help to enhance Indonesian economy because those countries are major trading partners of Indonesia (CIA, 2010). Therefore, affirmative economic instruction execution of those countries will give favorable result for Indonesian Stock Market (Chuan, 2004).Indonesian stock prices get significant intrusion from US, China, Japan, and Singapore stock prices. JCX mixed index or IHSG obtain significant influence from world-wide stock market especially DJIA (Dow Jones Industrial Average), Nikkei 225, Hang Seng and passing play quantify. Investors always visualize at those stocks beforehand and during trading stocks in Indonesia Stock Exchange.Export partners and consequence partners of Indonesia will affect local economy and price of JSX intricate index in Indonesian Stock Exchange (Samsul, M. 2006). For example, JCX composite index in 7 May 2010 decreased significantly (71.29 points or 2.54%) because of the decrease of worldwide stock market. Dow Jones Industrial Average decreased 407.05 points or 3.75%, Nikkei decreased 331.1 points or 3.1%, Hang Seng decreased 213.12 points or 1.06%, and Strait Times decreased 6.7 points or 0.59%. The decrease of worldwide stock market had significant influence on Indonesian stock prices (Meryani, A. 2010). simulacrum 2.2 Indonesia Export Partners 2009 pedigree adapted from CIA, 2010Figure 2.3 Indonesia Import Partners 2009Source adapted from CIA, 2010Local frugalitygross domestic product or Gross Domestic intersection point is regularly used as an index finger of economic performance of the democracy. Brux (Brux, J.M. 2008, p. 351) states that Gross Domestic Product (GDP) is defined as the market value of all final goods and work produced in the economy in a given time period (usually one year). There are two different types of GDP as follow nominated GDP.Nominal GDP is GDP that determined at current prices or actual prices of a particular year. received GDP.Real GDP is GDP which adjusted for rising prices.GDP is generally used as indication of standards of reenforcement in a demesne. If GDP is high, there is an surmisal that economy in a country is doing well and this country has high standards of sprightliness. When GDP is growing, there is an assumption that economic activity in a country and standards of living are rising (Brux, 2008).When GDP of a country shows positive growth, it is usually followed by positive trend in stock market. Therefore, GDP is oftentimes used by investors to estimate turning points of their stocks and to time their investment.GDP growth and other economic data are published in newspaper. When investors read this information, investor should subsist how to use the information wisely. For instance, when banking sector is predicted to perform badly, investors should countenance out banking stocks in their st ock investment. This information will help investors to choose their stocks and make cleanse decision whether they have to buy, sell, or hold the shares. When economic condition in a country is good, stock prices generally tend to increase. However, investors have to be careful because it is also a sign that good days are numbered. Economy which is growing too fast will be knockout to principal(prenominal)tain its growing or to be sustained (Chuan, 2004).Political FactorStock price can be affected by regional, national, and global political situation. Political crisis usually will have negative impact in stock market trends. Stock prices generally will drop significantly because of political crisis (Chuan, 2004).InflationAccording to airlift (Hook, J.A. 2003, p. 110), Inflation is A condition in which the economy experiences a incessant increase in the average price level of all goods and work. The price of certain goods and service may decrease but the average price of all goods and services increases. Financial service industries and banking are influenced significantly by pompousness (Hook, J.A. 2003). Inflation can also be defined as a state that has continuous increase in prices of goods and services. Inflation will increase the constitute of doing strain because price of goods and services increases significantly. Therefore, it is expensive to do business during ostentation and profit margins of business will decrease due to higher(prenominal) price of raw materials, rentals, etc (Chuan, 2004).Potential earnings of companies will determine the entreat for a stock. Therefore, potential earnings of many companies generally decreased during inflation period due to the lower read for stock. The lower demand for a stock will cause the decrease of stock prices in stock market. Investors should assist at the growing of inflation and sell their stocks before inflation happens. Investors can use goodness prices and interest order as indicators o f inflation trend. When commodity prices and interest grade are rising, those factors indicate the plan of attack of inflation. Investors should have care to enter the stock market (Chuan, 2004).Foreign Exchange RatesTaylor, F. states that foreign exchange rate is the ratio which is used to metamorphose one bullion into another. Most countries around the world have their own currencies released by certain official agency which is called monetary authority or commutation bank. cash is medium of exchange which is used to buy goods and services (Taylor, F. 2003).According to Philip (Philip et al. 2000), there are types of exchange rate administration as follow waxy Exchange Rates.Flexible exchange grade agreement is an exchange rate system which the value of currency is permitted to react to market forces without any hinderance by central banks or monetary authority. obstinate Exchange Rates. unbending exchange rates system is an exchange rate system which feller countries a gree to fix the value and changes only move on under certain particular condition. This exchange rate system can reduce doubtfulness from international trade and support long term investment in international trade.Managed Floating.Managed floating is an exchange rate system which currency is allowed to act to market changes but central banks are allowed to interject in order to protect the value of the currency especially when central banks believe that disparagement is only temporary.Stock-Oriented models of exchange rates which also know as portfolio-balance approaches view exchange rates as equating demand and supply for certain assets especially stocks and bonds. Financial assets are valued by present set of future cash flows, expectations of relative currency determine have significant role in price movements especially for internationally held financial assets. Therefore, stock prices are influenced by exchange rates movement (Ajayi and Mougoue, 1996).JCX list or IHSG g ets significant influence from the variant of USD/IDR exchange rate. USD/IDR indicates how many IDR (Indonesia currency) per US dollar. The decrease of IDR currency in term of US dollar is generally followed by the decrease of several Indonesia stock prices such as Telkom, ASTRA International, Bakrie Telecom, Kalbe Farma, etc (Sihombing,G. 2008). Figure 2.4 shows that the version of USD/IDR exchange rate is very high. Therefore, Indonesian investors should look at USD/IDR exchange rate as consideration in trading stocks (Yahoo, 2010).Figure 2.4 USD/IDR Exchange Rates from 2005 to 2010Source Yahoo, 2010 following RatesFrumkin (Frumkin, N. 2000, p. 190) states that amuse is the appeal of borrow specie, and interest rates are the price of money. Interest rates which refer to yields are the annualized percentage that interest is of the principal of the loan.Interest rate is a good indicator of inflation trends because of its role as regulatory device to monitor the inflation tren ds. If interest rate increases, the embody of borrowing money will become higher and more expensive. investment and developing business will be more expensive. Therefore, the economic growth is decrease and the inflation is under control. anyway as an indicator of inflation trends, interest rates also affect stock market and have significant influence in stock prices.When interest rate in a country is low that indicates stable or low inflation rates, stock market generally shows its positive trends and has tendency to be more active. Many investors prefer to put their money on other investments kind of than put their money in bank deposits due to lower fixed interest rate. Investors will obtain lower return from bank deposits than return which comes from other investments especially stocks or shares.In addition, the speak to of borrowing money becomes cheaper and this makes investors advance their special borrowing for investment. Therefore, low interest rate will give positiv e impact to stock market in impairment of rising stock prices. Investors have to be more careful when there is news about increasing interest rates. Investors should look at the change of interest rates regularly because of the impact of interest rates on their stock prices (Chuan, 2004). change magnitude interest rates will give a negative exercise on many companies which have large debts or loans because of the rising of cost of borrowing. The profit of the companies and ability to grow will decrease. When the profit of companies decrease, stock prices generally becomes less attractive and their stock prices decrease. When interest rates become high, investors usually react in two possible outcomes as follow (Mladjenovic, P. 2009)Investors may sell some of their stocks to pay their interest loans or debts. If many investors sell their stock, it will give negative effect on stock prices. Stock prices tend to decrease because there are more sellers than buyers in stock market.hig her(prenominal) interest rates may cause investors swap change their investment from stocks to bonds or bank deposits which offer higher return.In Indonesia, interest rate decisions are decided by primaeval Bank of majority rule of Indonesia. Indonesia interest rates dropped significantly over the years that can be seen in figure 2.5. The decrease of interest rates will attract more investors to invest their money on stock market (Trading frugals, 2010).Figure 2.5 Indonesia Interest Rates from 2006 to 2010Indonesia Interest RateSource Trading Economics, 2010Commodity PricesBasic commodities which are required in the output signal process of some goods and services are good indicators of inflation trends. Those commodities are crude, rubber, steel, etc. When the prices of those commodities increase, the cost of goods and services will also increase. Therefore, when the prices of most commodities increase, it may be an indication of inflation. Investors should have carefulness t o enter the stock market. Besides as an indicator of inflation trends, commodity prices especially oil prices also affect stock market and have significant influence in stock prices (Chuan, 2004).higher(prenominal) oil prices will have significant impact on stock market returns especially the aggregate effect of stock prices. Higher oil prices may cause the rising of production cost which will give great forces on industry equity returns. In oil export countries, higher oil prices will increase dough from oil, gas, coal, and vary resources industries. Higher oil prices may cause the rising of stock prices especially for oil exporting countries which depends on relative significance of the industries (Chen, A. H. 2008).JCX composite index or IHSG gets significant influence from the fluctuation of oil prices. For instance, the price of oil in early 2008 increased significantly to US$ 147 per put and then decreased drastically to US$ 36 per barrel. The price of JCX composite index f ollowed the fluctuation of oil prices. In the early 2008, JCX composite index increased to IDR 2800. At the end of this year, JCX composite index decreased to IDR 1 nose candy (more than 100%) because of the decrease of oil prices. Indonesian stock prices generally follow the fluctuation of oil prices. When the oil prices decrease, stock prices usually also decrease and otherwise. Therefore, Indonesian investors should look at the movement of oil prices as consideration in trading stocks (Sidarta, W. 2010).Research simulationStock price in Indonesia Stock Exchange is the main axis in the research framework. The potential external environmental factors which influence stock price areEconomic factors.Economic factors consist of worldwide stock market (DJIA, Hang Seng, Nikkei, and Strait Times), local economy (GDP), inflation, interest rates, exchange rates (USD/IDR exchange rates), and commodities prices (oil price). Interest rates and commodities prices have correlation with inflati on because the movements of those factors are indicator of inflation trends.Political factors.Stock price can be affected by regional, national, and international political situation such as political crisis.All of those potential factors will become consideration factors for Indonesian investors in order to make correct decision whether they have to buy, sell, or hold their stocks. The research framework can be seen in figure 2.6.Figure 2.6 Research FrameworkPOLITICAL divisorECONOMIC FACTORSSTOCK PRICE(JCX Composite Index or IHSG) sideline rateINFLATIONOIL PRICESEXCHANGE RATES(USD/IDR)LOCAL frugality (GDP)WORLDWIDE STOCK MARKET(DJIA, NIKKEI, HANG SENG, speech sound TIMES)Source The police detectiveSummaryThe research topic in this break down is An Empirical pack of Factors Influencing Stock Prices in Indonesia Stock Exchange. The report consists of insane asylum, literature review, and reference. Chapter 1 introduction identifies background of the research, objectives of the research, research question, research hypotheses, and scopes. Chapter 2 literature review provides knowledge and theories that are related to research topic. Summary and translation of external environmental factors which influence stock prices will be provided in this chapter. At the end of this chapter, the author provides research framework in this report. Factors and frameworks will be appeared by joining and integrating adopted theories. Lastly, references show the sources of all information used in this research.Factors Influencing Stock Prices in Indonesia ExchangeFactors Influencing Stock Prices in Indonesia ExchangeThere are many definitions of stock with different point of view. Bernstein states that stocks are partial ownership of companys assets which are subordinated with debt (Bernstein, R. 2002). Stock is a device that implies an ownership position in a company and signifies a claim on its proportional share in companys assets and profits. Only certain companies ha ve stock called corporation. Limited partnership and Sole proprietorship do not issue stock (WebFinance, Inc., 2010). According to Vernimmen et al. (Vernimmen et al. 2009, p. 527), A stock or a share is a security that is not redeemed. The investment can only be recognized through disposal and whose revenue flows is uncertain.Corporations need financial resources and this required resources usually come from ordinary or common stocks, preferred stocks, and medium to long term lenders or debenture holders. Common stock is everlasting capital for the corporation. The owners who invest in this type of stock are called ordinary or common shareholders and any profit retained after paying debenture interest will be distribute to them called dividend. Preferred stocks are issued to public in order to acquire capital and these stocks have rights to specified yearly fixed percentage dividend on the paid-up capital. Preferred stocks are less common in stock market (Anandarajah, Aseervatham, a nd Reid 2005). The following are the characteristics of common stock and preferred stocks (Scott et al. 1999).Preferred StockA hybrid security which has similar characteristics to bonds and common stocks.It is similar to bonds in its dividends which are limited in amount.It is similar to common stocks in that it has no fixed maturity date, dividends are not deductible in terms of tax purposes, and non-payment of dividends will not cause bankruptcy.Common Stock.Common stock shares imply an ownership in corporation which does not have maturity date and exists as long as the firm does.Stock exchange is an organization which helps connection between potential buyers and potential sellers of stocks. Stock exchange can be physical place, network of computers, system of telephone link, etc. A stock market is a place where stocks can be purchased and sold (Samuel, J.M., Wilkes, F.M., and Brayshaw, R.E. 1996). Most of countries around the world have stock exchanges. The number of stock excha nges around the world is growing significantly. Based on continents, stock exchanges around the world can be divided into 6 Africa, Asia, Europe, Middle East, North America, and South America. Indonesia Stock Exchange called IDX is one of the stock exchanges in Asia (Stock Exchanges Worldwide Links, n.d., 2010).Principally, there are 2 advantages are obtained by investor who buying or having stocks in stock exchanges (Indonesia Stock Exchange, 2007)Dividend.Dividend is sharing profit awarded by a company because of holding stock for a relatively long period until ownership term is in period where an investor is recognized as shareholder who has right to get dividend.Capital Gain.Capital gain is the difference between selling price and buying price acquired from trading activities.Those advantages cause investors choose stocks as an attractive alternative than put their money in fixed deposits that have low interest rates (Chuan, 2004).Basically, investors who buying or having stocks will also have some risks (Indonesia Stock Exchange, 2007)Capital Loss.Capital loss is a situation when an investor is selling the stocks at lower price than the buying price.Liquidity Risk.A company with shares held by public is declared for its bankruptcy by the Court. Shareholders or investors will have the last priority of claiming their rights after all liabilities are fulfilled. The rest of the companys wealth will be shared proportionally to the shareholders. Shareholders will not obtain anything from the liquidation if there is no rest left.The overall price movements of common stocks of corporations traded on stock markets are called stock market price indexes. Corporate stockholders will get benefit from company through dividends and have right to vote in company. Investors capital gains and losses will affected by increasing and falling of stock prices (Frumkin 2000). Norman (Frumkin, N. 2000, p. 277) states that The dividend yield, which is the rate of return on a share company stock, is a companys annual cash dividend percentage of companys annual stock price.Nowadays, the price of stocks in Indonesia Stock Exchange is changing rapidly. The average price of stocks in Indonesia Stock Exchange increased significantly (approximately 20%) during 2006. The average price decreased approximately 19% during January 2008 and declined again approximately 16% during March 2008. The significant change of stock prices in Indonesia Stock Exchange is caused by external environmental factors or macroeconomics factors (Frensidy, B. 2008). There are many external environmental factors that impact financial system including stocks. Those factors are economic growth, inflation, exchange rates, interest rates, etc (Evans, et al. 2000).Many investors lost their money because of the significant change of stock prices in Indonesia Stock Exchange. Investors lost their capital because they sell their stocks at lower price than the buying price (Indonesia Stock Exchange, 2 007). By analyzing external environmental factors, investors can predict the future price of stocks more accurately. To minimize the risk or capital loss, investors have to understand external environmental factors influencing stock prices in order to make correct decision whether they have to buy, sell, or hold the shares. The research will identify external environmental factors which have significant influence on stock prices and explain the relationship between those factors and stock prices in order to accomplish that goal.Objectives, Research Question, and Research HypothesesThe objectives of the research areTo identify the variables of external environmental factors influencing the stock prices in Indonesia Stock Exchange.To analyze the influence of external environmental factors on stock prices in Indonesia Stock Exchange.Based on the objectives, the research questions are as followWhich external environmental factors influence stock prices in Indonesia Stock Exchange?How do es external environmental factors influence on stock prices in Indonesia Stock Exchange?Based on the research question, the research hypotheses are built upExternal environmental factors encourage the change of stock prices in Indonesia Stock Exchange.External environmental factor have strong correlation with stock prices in Indonesia Stock Exchange.ScopeThis research study will focus on external environmental factors influencing the stock prices in Indonesia stock exchange, which will be explained more briefly in chapter 2 literature reviews. Some external environmental factors influencing stock prices are applied to explain the correlation between external environmental factors and stock prices in Indonesia Stock Exchange. The analysis of what kind of relationship (positive or negative) between external environmental factors and stock prices will also be clarified in this research.The literature reviews will consist of some external environmental factors which influence stock pric es especially in Indonesia Stock Exchange. A survey will be performed in order to collect data about the change of several external factors and stock prices in Indonesia Stock Exchange. Based on collected data, a model will be offered to analyze the relationship between stock prices and external environmental factors.Lastly, this research will be limited and focused on the followingThe research is only focused on JSX composite index or (Indonesian Indeks Harga Saham Gabungan, IHSG).This research is only focused on external environmental factors which influence stock prices.The data collection period of this research is 5 years from 2005 to 2009.Chapter 2LITERATURE REVIEWLiterature Review of External Environmental Factors and Stock Prices in Indonesia Stock ExchangeThis chapter will summarize external environmental factors which influence stock prices. Factors and frameworks will be appeared by joining and integrating adopted theories. Lastly, the major external environmental factors influencing stock prices in Indonesia Stock Exchange will be provided in this chapter.Categories of Stocks and Types of OrdersIn the market, there are various names of stocks that refer to different categories of stocks (Chuan, 2004)Figure 2.1 Categories of StocksSource adapted from Chuan, 2004Blue Chips refer to stocks that are steady with good fundamentals.Undervalued Stocks refer to stocks which are well-established by companies with solid balance sheet. Such stocks are generally unnoticed by investors, traded with small volume, and receive little reporting from media and analysts or experts.Growth Stocks refer to stocks which are established by recognized companies that have high growth sectors and their business are predicted to enlarge quickly over the coming years. Such stocks are generally traded with higher PER (Price Earnings Ratio) even though they lack of history of strong earnings base. While companies show continual rise in their earnings, the price of these stocks wi ll increase.Penny Stocks refer to stocks that have small capitalization and traded bellow one dollar.Small-Cap Stocks refer to stocks that have very few issued shares and traded in low price at stock market. Such stocks are usually not bought by foreign institutions and funds. Small-Cap Stocks have some risks as followSmaller companies tend to less flexible to major crisis because they are less diversified and more prone to market shocks and monetary crisis.Trading volumes are low and less liquid. Therefore, investors may not find the buyers in stock market when they want to sell the stocks.Small-Cap Stocks are more sensitive to news and rumors.There are 3 types of orders used in the buying and selling of stocks as follow (Chuan, 2004)Market OrderMarket order is an order to buy or sell stocks instantly at the best current price. For example, investors place market order to sell AAA shares. It means investors buy AAA shares at current offering price.Limit OrderInvestors which place l imit order will set a certain suitable price to buy or sell a particular stock.Stop OrderStop order is an order to buy or sell the stocks that are traded at certain price level immediately. This certain price level is known as stop price. For instance, investors place stop order to buy AAA shares at $5.00. If AAA shares begin to trade at $5.00, the order becomes market order and broker will buy shares at the best current price. In terms of selling stop order, the order is placed bellow current price to help investors decrease their possible losses and keep their profit.Timing and Stock InvestmentInvestor would discourage when the price of their stocks decreased significantly after they had bought the stocks or to be trapped in market crash after they had invested their money in the stock market. Good timing is the most crucial factor for investors in stock market. Even the best stocks will become useless investments if investors buy them at wrong time (George, A. 2008). The major pr oblem is good timing cannot be determined easily because stock market is influenced by large amount of factors and events that are beyond prediction. Investors have to understand factors influencing stock price and involve some insight to determine good timing whether they have to buy, sell, or hold their stocks (Chuan, 2004).In stock investment, price is mechanism by which practically all goods and services are exchanged. In this case, price has strong power or price is a king because price will determine whether stocks become excessively expensive or inexpensive (George, A 2008). The price of stocks tends to increase when there are more buyers than sellers in stock market. Buyers are tense in stock market based on expectation of future price increase. There are some signals which make buyers believe that future stock price will increase (Chuan, 2004)Positive indication from market trend.Rumors in stock market.Information concerning better earnings prospects for company.External En vironmental Factors Influencing Stock PricesThere are several external environmental factors influencing the uptrend or downtrend of stock prices in stock market. Those external environmental factors areWorldwide stock market.Local economy.Political factor.Inflation.Foreign Exchange Rates.Interest Rates.Commodity Prices.Worldwide Stock MarketThe performance of world economy will have effect on local economy or Indonesian economy due to globalization. The worldwide economy especially US, China, Japan, and Singapore economy will help to enhance Indonesian economy because those countries are major trading partners of Indonesia (CIA, 2010). Therefore, positive economic performance of those countries will give favorable result for Indonesian Stock Market (Chuan, 2004).Indonesian stock prices get significant impact from US, China, Japan, and Singapore stock prices. JCX composite index or IHSG obtain significant influence from worldwide stock market especially DJIA (Dow Jones Industrial Av erage), Nikkei 225, Hang Seng and Strait Times. Investors always look at those stocks before and during trading stocks in Indonesia Stock Exchange.Export partners and import partners of Indonesia will affect local economy and price of JSX composite index in Indonesian Stock Exchange (Samsul, M. 2006). For example, JCX composite index in 7 May 2010 decreased significantly (71.29 points or 2.54%) because of the decrease of worldwide stock market. Dow Jones Industrial Average decreased 407.05 points or 3.75%, Nikkei decreased 331.1 points or 3.1%, Hang Seng decreased 213.12 points or 1.06%, and Strait Times decreased 6.7 points or 0.59%. The decrease of worldwide stock market had significant influence on Indonesian stock prices (Meryani, A. 2010).Figure 2.2 Indonesia Export Partners 2009Source adapted from CIA, 2010Figure 2.3 Indonesia Import Partners 2009Source adapted from CIA, 2010Local EconomyGDP or Gross Domestic Product is regularly used as an indicator of economic performance of the country. Brux (Brux, J.M. 2008, p. 351) states that Gross Domestic Product (GDP) is defined as the market value of all final goods and services produced in the economy in a given time period (usually one year). There are two different types of GDP as followNominal GDP.Nominal GDP is GDP that determined at current prices or actual prices of a particular year.Real GDP.Real GDP is GDP which adjusted for inflation.GDP is generally used as indicator of standards of living in a country. If GDP is high, there is an assumption that economy in a country is doing well and this country has high standards of living. When GDP is growing, there is an assumption that economic activity in a country and standards of living are rising (Brux, 2008).When GDP of a country shows positive growth, it is usually followed by positive trend in stock market. Therefore, GDP is often used by investors to estimate turning points of their stocks and to time their investment.GDP growth and other economic data are published in newspaper. When investors read this information, investor should know how to use the information wisely. For instance, when banking sector is predicted to perform badly, investors should leave out banking stocks in their stock investment. This information will help investors to choose their stocks and make correct decision whether they have to buy, sell, or hold the shares. When economic condition in a country is good, stock prices generally tend to increase. However, investors have to be careful because it is also a sign that good days are numbered. Economy which is growing too fast will be difficult to maintain its growing or to be sustained (Chuan, 2004).Political FactorStock price can be affected by regional, national, and international political situation. Political crisis usually will have negative impact in stock market trends. Stock prices generally will drop significantly because of political crisis (Chuan, 2004).InflationAccording to Hook (Hook, J.A. 2003, p. 110), Inflation is A condition in which the economy experiences a continuous increase in the average price level of all goods and services. The price of certain goods and services may decrease but the average price of all goods and services increases. Financial service industries and banking are influenced significantly by inflation (Hook, J.A. 2003). Inflation can also be defined as a state that has continuous increase in prices of goods and services. Inflation will increase the cost of doing business because price of goods and services increases significantly. Therefore, it is expensive to do business during inflation and profit margins of business will decrease due to higher price of raw materials, rentals, etc (Chuan, 2004).Potential earnings of companies will determine the demand for a stock. Therefore, potential earnings of many companies generally decreased during inflation period due to the lower demand for stock. The lower demand for a stock will cause the decrease of s tock prices in stock market. Investors should look at the growing of inflation and sell their stocks before inflation happens. Investors can use commodity prices and interest rates as indicators of inflation trend. When commodity prices and interest rates are rising, those factors indicate the coming of inflation. Investors should have carefulness to enter the stock market (Chuan, 2004).Foreign Exchange RatesTaylor, F. states that foreign exchange rate is the ratio which is used to convert one currency into another. Most countries around the world have their own currencies released by certain official agency which is called monetary authority or central bank. Currency is medium of exchange which is used to buy goods and services (Taylor, F. 2003).According to Philip (Philip et al. 2000), there are types of exchange rate system as followFlexible Exchange Rates.Flexible exchange rates system is an exchange rate system which the value of currency is permitted to react to market forces without any intervention by central banks or monetary authority.Fixed Exchange Rates.Fixed exchange rates system is an exchange rate system which associate countries agree to fix the value and changes only occur under certain particular condition. This exchange rate system can reduce uncertainty from international trade and support long term investment in international trade.Managed Floating.Managed floating is an exchange rate system which currency is allowed to respond to market changes but central banks are allowed to interfere in order to protect the value of the currency especially when central banks believe that depreciation is only temporary.Stock-Oriented models of exchange rates which also known as portfolio-balance approaches view exchange rates as equating demand and supply for certain assets especially stocks and bonds. Financial assets are valued by present values of future cash flows, expectations of relative currency values have significant role in price movements esp ecially for internationally held financial assets. Therefore, stock prices are influenced by exchange rates movement (Ajayi and Mougoue, 1996).JCX Index or IHSG gets significant influence from the fluctuation of USD/IDR exchange rate. USD/IDR indicates how many IDR (Indonesia currency) per US dollar. The decrease of IDR currency in term of US dollar is generally followed by the decrease of several Indonesia stock prices such as Telkom, ASTRA International, Bakrie Telecom, Kalbe Farma, etc (Sihombing,G. 2008). Figure 2.4 shows that the fluctuation of USD/IDR exchange rate is very high. Therefore, Indonesian investors should look at USD/IDR exchange rate as consideration in trading stocks (Yahoo, 2010).Figure 2.4 USD/IDR Exchange Rates from 2005 to 2010Source Yahoo, 2010Interest RatesFrumkin (Frumkin, N. 2000, p. 190) states that Interest is the cost of borrowing money, and interest rates are the price of money. Interest rates which refer to yields are the annualized percentage that i nterest is of the principal of the loan.Interest rate is a good indicator of inflation trends because of its role as regulatory device to monitor the inflation trends. If interest rate increases, the cost of borrowing money will become higher and more expensive. Investing and developing business will be more expensive. Therefore, the economic growth is decrease and the inflation is under control. Besides as an indicator of inflation trends, interest rates also affect stock market and have significant influence in stock prices.When interest rate in a country is low that indicates stable or low inflation rates, stock market generally shows its positive trends and has tendency to be more active. Many investors prefer to put their money on other investments rather than put their money in bank deposits due to lower fixed interest rate. Investors will obtain lower return from bank deposits than return which comes from other investments especially stocks or shares.In addition, the cost of borrowing money becomes cheaper and this makes investors advance their additional borrowing for investment. Therefore, low interest rate will give positive impact to stock market in terms of rising stock prices. Investors have to be more careful when there is news about increasing interest rates. Investors should look at the change of interest rates regularly because of the impact of interest rates on their stock prices (Chuan, 2004). Increasing interest rates will give a negative effect on many companies which have large debts or loans because of the rising of cost of borrowing. The profit of the companies and ability to grow will decrease. When the profit of companies decrease, stock prices generally becomes less attractive and their stock prices decrease. When interest rates become high, investors usually react in two possible outcomes as follow (Mladjenovic, P. 2009)Investors may sell some of their stocks to pay their interest loans or debts. If many investors sell their stock, it will give negative effect on stock prices. Stock prices tend to decrease because there are more sellers than buyers in stock market.Higher interest rates may cause investors swap change their investment from stocks to bonds or bank deposits which offer higher return.In Indonesia, interest rate decisions are decided by Central Bank of Republic of Indonesia. Indonesia interest rates dropped significantly over the years that can be seen in figure 2.5. The decrease of interest rates will attract more investors to invest their money on stock market (Trading Economics, 2010).Figure 2.5 Indonesia Interest Rates from 2006 to 2010Indonesia Interest RateSource Trading Economics, 2010Commodity PricesBasic commodities which are required in the production process of most goods and services are good indicators of inflation trends. Those commodities are oil, rubber, steel, etc. When the prices of those commodities increase, the cost of goods and services will also increase. Therefore, when the prices of most commodities increase, it may be an indication of inflation. Investors should have carefulness to enter the stock market. Besides as an indicator of inflation trends, commodity prices especially oil prices also affect stock market and have significant influence in stock prices (Chuan, 2004).Higher oil prices will have significant impact on stock market returns especially the aggregate effect of stock prices. Higher oil prices may cause the rising of production cost which will give great forces on industry equity returns. In oil exporting countries, higher oil prices will increase profits from oil, gas, coal, and vary resources industries. Higher oil prices may cause the rising of stock prices especially for oil exporting countries which depends on relative significance of the industries (Chen, A. H. 2008).JCX composite index or IHSG gets significant influence from the fluctuation of oil prices. For instance, the price of oil in early 2008 increased significantly to US$ 147 per barrel and then decreased drastically to US$ 36 per barrel. The price of JCX composite index followed the fluctuation of oil prices. In the early 2008, JCX composite index increased to IDR 2800. At the end of this year, JCX composite index decreased to IDR 1100 (more than 100%) because of the decrease of oil prices. Indonesian stock prices generally follow the fluctuation of oil prices. When the oil prices decrease, stock prices usually also decrease and otherwise. Therefore, Indonesian investors should look at the movement of oil prices as consideration in trading stocks (Sidarta, W. 2010).Research FrameworkStock price in Indonesia Stock Exchange is the main axis in the research framework. The potential external environmental factors which influence stock price areEconomic factors.Economic factors consist of worldwide stock market (DJIA, Hang Seng, Nikkei, and Strait Times), local economy (GDP), inflation, interest rates, exchange rates (USD/IDR exchange rates), and commod ities prices (oil price). Interest rates and commodities prices have correlation with inflation because the movements of those factors are indicator of inflation trends.Political factors.Stock price can be affected by regional, national, and international political situation such as political crisis.All of those potential factors will become consideration factors for Indonesian investors in order to make correct decision whether they have to buy, sell, or hold their stocks. The research framework can be seen in figure 2.6.Figure 2.6 Research FrameworkPOLITICAL FACTORECONOMIC FACTORSSTOCK PRICE(JCX Composite Index or IHSG)INTEREST RATESINFLATIONOIL PRICESEXCHANGE RATES(USD/IDR)LOCAL ECONOMY (GDP)WORLDWIDE STOCK MARKET(DJIA, NIKKEI, HANG SENG, STRAIT TIMES)Source The ResearcherSummaryThe research topic in this study is An Empirical Study of Factors Influencing Stock Prices in Indonesia Stock Exchange. The report consists of introduction, literature review, and reference. Chapter 1 int roduction identifies background of the research, objectives of the research, research question, research hypotheses, and scopes. Chapter 2 literature review provides knowledge and theories that are related to research topic. Summary and explanation of external environmental factors which influence stock prices will be provided in this chapter. At the end of this chapter, the author provides research framework in this report. Factors and frameworks will be appeared by joining and integrating adopted theories. Lastly, references show the sources of all information used in this research.